Cost Control

Nakayama Takuya soon arranged to meet with Director Terauchi and Director Hatano in the headquarters' senior management conference room.

He gently placed a neatly printed cost analysis report in front of the two directors.

"Director Terauchi, Director Hatano."

Nakayama Takuya's voice was calm, without any unnecessary inflection.

"This is the latest estimated production cost per unit for our new mainframe: 26,000 Japanese yen."

Director Terauchi picked up the report, his gaze sweeping over it carefully behind his glasses, his brow furrowing almost imperceptibly. He adjusted his glasses, his fingertip lingering for a moment on the number "26,000".

Director Hatano also moved closer, his expression equally grave. He didn't immediately pick up his own copy, but instead looked at the report in Terauchi's hand, his expression changing several times.

"26,000 Japanese yen— " Director Terauchi put down the report and looked at Takuya. "Takuya, this figure, based on this hardware list, is better than our initial worst-case scenario. But on Nintendo's side, the FC..."

Their costs are probably already lower than we can imagine, but they haven't lowered the price in the four years since they launched it. We have to be wary of a price war." His tone didn't sound accusatory, but it revealed a heavy consideration of the market reality.

Director Hatano sighed, took his report, and flipped through it. "We've all seen the technological breakthroughs, and the Hardware Department's efforts are commendable. However, this cost will put our pricing strategy in a very passive position. The market, especially parents and children, is very price-sensitive." He rubbed his temples.

Nakayama Takuya nodded, unsurprised by the two directors' reactions. "I completely understand your concerns. This cost figure is indeed a challenge we must face squarely." He leaned forward slightly. "The Hardware Department has done its utmost to optimize within the existing technological framework. However, this report is only a preliminary result, not the final conclusion."

He paused, his tone calm yet carrying undeniable weight. "I have instructed the Hardware Department to continue researching the feasibility of alternative components and optimizing the supply chain, without sacrificing core performance and stability."

Director Terauchi and Director Hatano exchanged a glance, seeing a hint of surprise in each other's eyes. They had expected to hear more complaints about the difficulties in cost control, but they hadn't anticipated that Takuya already had follow-up plans.

This eased the slightly tense atmosphere in the meeting room a little.

They are all seasoned business veterans, and they deeply understand what cost control means for a product, especially a home video game console designed to penetrate the mass market.

A cost of 26,000 Japanese yen means that the retail price must be set at least higher to ensure a reasonable profit margin.

As a special commodity, game consoles primarily generate revenue through royalties. Even if they are sold at cost, their competitiveness will be significantly reduced at that price.

As for selling at a loss, Takuya knew that in his previous life, what dragged Sega down was the continuous sale of consoles at a loss. Since the game royalties could not cover the losses, Sega would naturally not accept selling consoles at a loss in the long term. At most, they could accept an initial release at a price slightly below cost, and that the cost could be reduced to below the release price in a short period of time.

This price point will undoubtedly put it at a significant disadvantage compared to the Nintendo Famicom, which already boasts a large user base and is significantly cheaper.

"This cost -"

The Terauchi put down the report, his knuckles tapping lightly on the table, producing a dull sound.

"If we price it this way, we will face significant pressure in our marketing efforts."

"I understand the concerns of both directors."

"So, I'm here today to discuss with you two how to further reduce this cost."

He first proposed a cost reduction plan at the first level.

"Regarding the parts of the main unit that have relatively low technical content and rely more on labor, such as the injection molding of the main unit casing, the internal brackets, various connecting cables, the power adapter, and even the soldering and assembly of some simple circuit boards..."

"My idea is to further expand the scope and depth of outsourcing to those electronics factories in Dongguan with which we have already established preliminary cooperative relationships through our Hong Kong company."

Upon hearing Terauchi, both Director Terauchi and Director Hatano's eyes flickered slightly.

Since their last trip to Hong Kong, some of their factories have indeed reaped the benefits of outsourcing part of the production of Pokémon Electronic Pet and some arcade parts to factories in Hong Kong and even Dongguan.

Not only were costs significantly reduced and production efficiency guaranteed, but more importantly, it freed up their energy to focus on the research and development and production of core technologies.

"We agree in principle to expanding outsourcing."

The Terauchi's director pondered for a moment.

"The previous collaboration between Poké Ball and arcade parts was indeed very effective; the production capacity and cost control of those factories basically met our expectations."

Director Hatano interjected, "But Takuya- kun, the cost of these peripheral components is ultimately limited."

"The real bulk of the profits lies in the core components, especially—chips."

That's the crux of the problem.

Nakayama Takuya took a deep breath, his expression turning serious.

"Yes, the director is absolutely right."

"The core of our new host is the MC68000 central processing unit, and the Z80 chip is responsible for audio processing."

Currently, it seems that in the short term, we will likely have to rely on suppliers in Japan.

He unfolded another document in his hand, which listed several potential chip suppliers and their technical characteristics.

"I have conducted a detailed study. Given the technological level and industrial landscape in 1987, neither Hong Kong nor Taiwan had a wafer foundry capable of obtaining licenses for relatively mature CPUs like the Z80 and achieving stable mass production."

"Although Huake Electronics has a 4-inch wafer production line, their process technology (3-5 micrometers) can theoretically cover the 6-micrometer process requirements of Z80, and they also have certain packaging and testing capabilities."

However, they lacked actual experience in CPU production, and more importantly, they didn't have official authorization from Ziog. Even if the China government were willing to provide strong support and bear the huge costs of ramping up yield rates, without authorization, it was all just empty talk.

The two directors nodded slightly; they had also heard about this information. The technological barriers and patent licensing in the chip industry are unavoidable hurdles.

Nakayama Takuya abruptly changed the subject, a sharp glint flashing in his eyes.

"However, what seems like an unsolvable predicament may also conceal a turning point."

"The two directors should also be aware of a recent major international event—the Toshiba incident."

Director Terauchi and Director Hatano immediately focused their attention.

The United States is using the pretext that Toshiba Machine Company violated the Coordinating Committee for Multilateral Export Controls (COCOM) by exporting high-precision CNC machine tools to the Soviet Union to exert unprecedented pressure on the Toshiba Group and the entire Japan semiconductor industry.

Raising tariffs, restricting market access, and scrutinizing technology transfers—a series of combined measures have left related Japan industries feeling helpless and frustrated.

"On the surface, this appears to be a crisis for Japan's semiconductor industry."

Nakayama Takuya lowered his voice slightly, revealing a keen insight into the situation.

"But for Sega, this could very well be an opportunity."

He paused, giving the two directors time to process the information, and then presented a strategic concept they had never considered.

I have a bold idea.

"We can take advantage of the current predicament of Japan semiconductor companies under sanctions, as well as the pressure for industrial relocation brought about by the continued appreciation of the Japanese yen."

"We at Sega, or through affiliated companies under our two directors, will actively promote or even directly invest in and 'encourage' our chip suppliers, such as Toshiba, to gradually transfer some of their production capacity and technology licensing for mid-to-low-end chips, such as the Z80, or other less technologically sensitive logic chips, to regions with lower labor costs and a certain industrial base."

For example—"Taiwan."

"Taiwan?"

Director Terauchi and Director Hatano raised their eyebrows almost simultaneously, their eyes filled with surprise.

This line of thinking is too far-fetched.

"Yes, Taiwan."

Nakayama Takuya nodded affirmatively.

"As far as I know, the Taiwan authorities have ambitious plans for developing the semiconductor industry and have introduced many supportive policies."

"We can pay special attention to a company that was recently established called ' Taiwan Semiconductor Manufacturing Company., Ltd.,' which is TSMC."

"Alternatively, seek in-depth cooperation with United Microelectronics Corporation, which already has a certain foundation, for licensed manufacturing."

"This will not only lay a solid foundation for Sega to obtain low-cost, stable chip supplies in the future, but also effectively mitigate the risks of over-reliance on a single supply chain."

"Furthermore, from a longer-term perspective, we are cultivating a more cost-competitive chip supply ecosystem for ourselves."

Director Terauchi and Director Hatano fell into deep thought.

Nakayama Takuya's words went far beyond the scope of simple procurement or OEM manufacturing.

This is almost a suggestion that they participate in shaping the regional semiconductor industry landscape.

This strategic concept of "saving the country through indirect means," or even "industrial incubation," shocked them and excited them at the same time.

"Takuya- kun, do you mean to take advantage of the current international trade situation?"

Director Hatano asked, clearly having grasped the key point.

"That's right."

Nakayama Takuya spoke with great certainty.

"In the trade friction between the US and Japan, Japan is destined to be the relatively weaker party. Given the way United States operate, this pressure is unlikely to fundamentally improve in the short term, or even for the next few years."

"Therefore, transferring some non-core, but high-volume, and relatively low-tech chip production capacity overseas, in order to seek lower production costs and more flexible cooperation models, is a way out that Japan semiconductor companies under pressure have no choice but to consider."

"This plan is definitely worth our in-depth investigation and study."

The two directors exchanged a glance, both seeing approval of the bold plan in each other's eyes.